Banks failing to comply with anti-corruption rules and sanctions lists

Officials named on Magnitsky lists as well as criminals can easily access global finance systems, study finds

Criminals including terrorists and tax evaders, as well as government officials subject to sanctions, can easily breach regulations meant to bar them from the international finance system, a study has found.

Banks and other financial firms around the world, including in the UK, are failing to comply with international anti-corruption rules, according to research by the University of Cambridge and the University of Texas at Austin.

The researchers emailed 5,000 banks and 7,000 other financial intermediaries in 273 countries and financial jurisdictions in 2020-21 to test compliance with rules meant to combat money laundering; the financing of terrorism; tax evasion; and Magnitsky Act legislation that allows sanctions to be imposed against specified Russian government officials.

The study found one in 30 banks did not comply with international regulations, increasing to one in 10 if discounting those that did not respond to the researchers’ emails. The results for the Magnitsky sanctions test found one in 20 companies did not comply, rising to one in-six if discounting non-responses.

The researchers set up 12 shell companies in countries recognised as a low risk for corruption including the UK and the US, and a high risk including Papua New Guinea and Pakistan, as well as in offshore jurisdictions, such as the British Virgin Islands. They then posed as representatives of those companies and sought to open bank accounts for them.

They also impersonated individuals from high-risk countries, including several Russians named on Magnitsky sanctions lists, then asked intermediary firms to set up shell companies on their behalf to limit liability, save tax and maintain their privacy. They also asked what, if any, documents would be required to verify their identity.

The research found people named on the Magnitsky lists could gain access to the financial system and evade the rules almost as easily as low-risk individuals, suggesting the sanctions were ineffective.

Jason Sharman, a professor of international relations at Cambridge, said: “It will take you one day to break these sanctions. You don’t have to break a sweat too much to send out 20 emails. And this is without hiding your identity as a high-risk individual. So even when the bad guys are incredibly obvious, incredibly stupid and open, this is still a proposition.”

The researchers said some of the individual responses to their emails indicated not just indifference to the regulations but a willingness to conspire with high-risk customers to break the rules by hiding the identity of the client from banks and the authorities.

In one response, a company representative explained how they could help a purported Russian client avoid Magnitsky sanctions by setting up a “shelf company”. These are firms that have already been set up, with a nominee director and nominee shareholder, so it appears to a bank they were established by someone other than the beneficial owner.

The researchers concluded that anti-money laundering rules and Magnitsky sanctions do not work because banks and intermediary corporate service provider firms “completely fail to discriminate between low- and extremely high-risk customers [which] is exactly the opposite of what the rules say should happen.

“Even just restricting the results to countries with Magnitsky legislation [the US, UK, Canada and European Union member states] … the same lack of sensitivity in the face of an obvious and extreme risk profile still holds.”

The researchers repeated their research this year, after the Russian invasion of Ukraine, and this time they found they were far less likely to receive a response using names on sanctions lists. However, there was little difference in compliance between firms in countries with Magnitsky laws and those without such legislation. The study concluded: “The effectiveness of these sanctions is a product of war rather than law.”

Sharman added: “Until the war starts, these incredibly high-risk people get treated exactly the same as Joe Bloggs, they are not getting scrutiny.”

The anti-corruption campaigner Bill Browder, who lobbied for the Magnitsky Act in the US, said: “The results of his investigation are a microcosm of everything that’s gone wrong – that western enablers were actively helping the Putin regime launder their money without any restraint or consequence.

“The reason why these company formation agents are so confident in flouting the rules is because they know that nothing will happen to them.”

Contributor

David Batty

The GuardianTramp

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